Kingsoft Cloud Holdings Limited

Thank you for standing by and welcome to the Kingsoft Cloud Holdings third quarter 2022 earnings conference call. All participants are in a listen-only mode. There will be a presentation followed by a question and answer session. If you wish to ask a question, you will need to press the star key followed by the number one on your telephone keypad. I would now like to hand the conference over to Ms. Nicole Shahan, IR Manager. Please go ahead.

Thank you, operator. Hello, everyone, and thank you for joining us today. Kingsoft Cloud's third quarter 2022 earnings release was distributed earlier today and is available on our IR website at ir.tsyun.com, as well as on global newsware services. On the call today from Kingsoft Cloud, we have our Vice Chairman and CEO, Mr. Tao Zou, and CFO, Mr. Henry He. Mr. Zhou will review our business strategies, operations, and company highlights, followed by Mr. Huang, who will discuss the financials and the guidance. They will be available to answer your question during the Q&A session that follows. There will be consecutive interpretation. Our interpretations are for your convenience and reference purpose only. In case of any discrepancy, management statement in original language will prevail. Before we begin, I would like to remind you that this conference call contains forward-looking statements within the meaning of Section 21E of the Security Exchange Act of 1934, as amended and as defined in the U.S. Private Security Litigation Reform Act of 1995. These forward-looking statements are based upon management's current expectations and current market and operating conditions, relate to U.N. standing well-known or unknown risks, uncertainties, and other factors. all of which are difficult to predict and many of which are beyond the company's control, which may cause the company's actual results, performance, or achievements to differ maturely from those in the forward-looking statements. Further information regarding these and other risks and certainties or factors are included in the company's filings with the USFDC. The company does not undertake any obligation to update any forward-looking statements. as a result of new information, future events, or otherwise except as required under applicable law. Finally, please know that unless otherwise stated, all financial figures mentioned during this conference call are denominated in RMB. It's now my pleasure to introduce our Vice Chairman and CEO, Mr. Zotao. Please go ahead. Thank you.

Hello, everyone.

Welcome to the 3rd quarter of 2022, Since we took office in August, this quarter, we have been working on the system of strategy, business, and financial situation. Based on this, we strongly recommend various measures. First of all, we continue to invest in technology, focus on the core of business, and return to the original and original nature of the cloud. Second, we have been working on customer and project management, managing costs, and optimizing interest rates. Hello, everyone.

Thank you all for joining Kingsoft Cloud's third quarter 2022 earnings call. Since taking on the CEO role in August, I have been leading the company through a systematic review of our strategy, business, and financials. And during the quarter, we continued to implement various initiatives in a solid and down-to-earth manner. First, we continued to invest in technology, focus on our core businesses, and revive our original vision for cloud services. Second, we continued to review and evaluate our customer base and project portfolio, strengthen cost control to achieve a better balance between revenue growth and profitability. At the same time, we continue to strengthen our ecosystem synergies, explore high-value business opportunities, and pursue a path of high-quality development.

We achieved solid financial performance in the quarter. Our total revenues were RMB 1.97 billion,

in line with our guidance adjusted gross margin improved significantly to 6.3 percent from 3.6 percent in the second quarter and our operating cash flow has been positive for two consecutive quarters indicating that our business adjustment and cost control efforts are starting to yield initial results

On the business side, the company is committed to technical business, focusing on the core product capabilities of iFast. According to the China Data Management and Resolution Program, which was first published in the third quarter, by the Salivin Research Institute, the comprehensive performance of the data management and resolution program of Xinshan Yun, the market leader of Jishen, In terms of business,

We adhere to the conviction of building success based on technology, continued to focus on building key product capabilities on the IaaS and PaaS layers. These efforts were recognized by Frost and Sullivan's LeadLEO Institute in its China Data Management Solutions Market Report published in the third quarter this year, in which Kingsoft Cloud Data Management Solutions ranks among the leaders of the market for innovation competency and growth performance. Meanwhile, IDC's latest edition of China's Software-Defined Storage Tracker 2022 First Half ranked our enterprise-level storage solution, King Storage, as top four in China's software-defined object storage market.

In terms of ecosystem collaboration,

We stepped up our technological cooperation with Kingsoft Office to achieve enhanced cloud document processing, including authentication, encryption, and proofreading. Leveraging our cloud computing capabilities, we helped Kingsoft Office strengthen the business logic layer for cloud document processing, and thereby further improved their end user experience.

In the face of different industry scenarios, the company continues to focus on creating standard cases to be applied to customers in the industry. In the field of public service, we create an economic brain for a core city, and use the technical capabilities of mixed cloud, distributed storage, etc. to promote economic business unity. In the field of finance, through large-scale the project cooperation of the shareholder bank, our data service, source data management, and other data management service capabilities are verified by the customer, and will continue to be reviewed in the industry. In the medical field, the imaging cloud project is about to be completed in Sichuan, Chongqing, etc. For the expansion and upgrade needs of customers with projects, the company provides a continuous service model.

In terms of different business scenarios, we continued to focus on our core industry verticals, replicating our successful Lighthouse projects and apply to customers in the respective sectors. In public services space, we built a smart cloud solution for our municipality, leveraging our hybrid cloud and distributed cloud storage technology, among others, to enable and facilitate the management of economic affairs in a coordinated and integrated manner. In financial services sector, we validated our data governance services capabilities, particularly in data lake and metadata management in various projects for major commercial banks. We will continue to replicate such success with more clients in the industry. In the healthcare sector, we're about to complete the capacity expansion projects for the medical image cloud in regions including Sichuan and Chongqing, a testament of our ongoing support and monetization to address our customers' needs to expand and upgrade their existing projects. Overall speaking, we will continue to invest in technology, focus on core businesses, and enhance the foundation and structure which enables sustainable, high-quality development. Under the backdrop of the wave of digitalization, we aspire to penetrate deep in verticals of strategic choice and offer our customers safe, robust, and efficient cloud computing services.

下面请CFO Harry为大家介绍一下三G的财务业绩。

I will now pass the call over to our CFO, Henry, to go over our financials for the quarter. Thank you.

Thank you, Zozo, and welcome everyone for joining the call. Now I will walk you through the financial results for the third quarter 2022. We have actively taken measures to improve efficiency, demonstrating our strong commitment to pave the path for profitability. This quarter, our adjusted growth margin has improved considerably and continuously, from the lowest point of 1.2% in the fourth quarter of 2022 to 3.6% in the second quarter this year, and further to 6.3% in the third quarter. Our operating cash flow has been positive for the past two quarters consecutively. And we have achieved 100.9 million RMB net operating cash flow this quarter. Our total revenue was 1,968.8 million RMB in Q3. Within that, revenues from public cloud services was 1,349.0 million RMB, while increased by 4.4% compared with Q2. It represents a 20.2% decrease compared to the same period in 2021. The change was primarily due to the company's proactive scaling down of CDM business, with its growth billing decreasing by about 28% on a YOY basis. Revenues from enterprise cloud services was 622.0 million RMB. which is relatively stable compared with Q2 2022 as we navigated a challenging operating environment, including the impact from resurgence of COVID-19 in China, while proactively applying more selective criteria to project screening to strive for better profitability and cash flow. Our cost saving measures are well on track within our plan. Total cost of revenues decreased by 20.6% year-over-year and remained stable quarter-to-quarter at 1,846.4 million RMB. IDC costs decreased significantly by 23.6% year-over-year from 1,410.9 million RMB to 1,087.3 million RMB this quarter. Depreciation and amortization costs increased by 26.9% from 200 million RMB in the same period of last year to 253.7 million RMB, while remaining stable compared to last quarter. It is in line with our revenue mix adjustments as we moderated the procurement process of servers of public cloud. Solution development and services costs increased from 160 million RMB to 443.1 million RMB this quarter. The increase was mainly due to the consolidation of Camelot since September last year. Fulfillment costs and other costs were 31.9 million RMB and 39.3 million RMB this quarter. The adjusted gross profit of this quarter was 124.7 million RMB. representing adjusted growth margin of 6.3%. The significant growth margin improvement was mainly due to the effect of cost control measures and strategic adjustments of our revenue mix. In terms of expenses, excluding share-based compensation, total adjusted operating expenses was 577 million RMB. Within that, adjusted R&D expenses was 231.6 million, increased from 190.8 million RMB from last quarter as we remain focused on our technology development. Adjusted selling and marketing expenses was 125.5 million RMB compared with 120.1 million RMB last quarter. Adjusted G&A expenses increased slightly from 196.0 million RMB last quarter to 219.9 million RMB, which is partially due to the one-time off expenses of a Hong Kong listing project. Net loss margin was 40.7% this quarter, and adjusted net loss margin was 24.8%. The adjustment was mainly due to the foreign exchange loss of 218.9 million RMB, caused by the significant fluctuation of U.S. dollar RMB exchange rates, which is totally a non-cash item impact on the P&L items. As of September 30, 2022, our cash and cash equivalents and short-term investments amounted to 5.3 billion RMB, providing us sufficient liquidity for operations. The capital expenditures for this quarter was 253.3 million RMB, which primarily consists of payments for servers, which we ordered previously. The decrease of capex was in line with our proactively scaling down our CDM business. We expect to keep our total capex within 1.5 billion RMB for the full year of 2022. In terms of share repurchase program, regarding our 100 million US dollar share repurchase program within a 12-month period as approved by the board and announced in March this year, we have been duly executing. Since the release of our Q2 earning results up to November 18, we bought a total of 10.41 million ADS shares. for roughly about $23.92 million. Going forward, supported by our ample cash reserve of about 5.3 billion RMB, we expect to continue to execute it from time to time as a way to mandate a repurchase program. These efforts fully demonstrate our board and management's strong commitment and full confidence in the long-term business prospects of the company. as we strive to reward our shareholders for their support, and we believe our share price will eventually reflect company true value. Finally, we submitted the application for Hong Kong's new primary listing on July 27, 2022. As always, the listing and the potential timing is subject to regulatory approval. Looking ahead, Although we are still implementing our strategy initiatives, including repositioning and cost control efforts on an ongoing basis, such adjustments have already yielded positive preliminary results as reflected in the clear improvement of the profit margin in Q3. We expect our total revenue to be between 2 billion RMB and 2.2 billion RMB for the fourth quarter of 2022. representing a quarter-over-quarter increasing of 1.6% to 11.7%. While these forecasts and comments above are based on our current and preliminary views of the market and operational environments, which are subject to change, we firmly believe that given the time, the effects of our ongoing strategic initiatives will continue to amplify and reflect on our financial in the mid to long term. Thank you.

Thank you. This concludes our prepared remarks. Thanks for your attention, and we are now happy to take your questions. Please ask your question in both Chinese Mandarin and English, if possible. Operator, please go ahead. Thank you.

Thank you. If you wish to ask a question, please press star then 1 on your telephone and wait for your name to be announced. If you wish to cancel your request, please press star then 2. If you are on a speakerphone, please pick up your handset to ask your question. Your first question today comes from Thomas Chang with Jefferies. Please go ahead.

另外的話就是關於我們Q4。 on the revenue guidance. Can you share with us your thoughts on the revenue guidance? Can you share with us your thoughts on the revenue guidance? Can you share with us your thoughts on the revenue guidance? Can you share with us your thoughts on the revenue guidance? Can you share with us your thoughts on the revenue guidance? Can you share with us your thoughts on the revenue guidance? Can you share with us your thoughts on the revenue guidance? Can you share with us your thoughts on the revenue guidance? Can you share with us your thoughts on the revenue guidance? Can you share with us your thoughts on the revenue guidance? Can you share with us your thoughts on the revenue guidance? Can you share with us your thoughts on the revenue guidance? Can you share with us your thoughts on the revenue guidance? Can you share with us your thoughts on the revenue guidance? Can you share with us your thoughts on the revenue guidance? Can you share with us your thoughts on the revenue guidance? Can you share with us your thoughts on the revenue guidance? Can you share with us your thoughts on the revenue guidance? Can you share And number two is about the Q4 revenue guidance. Can management comment about the trend for public and enterprise cloud during the quarter? Thank you.

Thank you, Thomas.

I don't know how to answer your question. It's very serious. This pandemic has really had a big impact on the entire industry, especially this year. This is not just about us. It should be said that it has a great impact on the whole society. In fact, we are the same. In fact, what kind of policy is the next step for the whole epidemic? And how long does this policy last? We are also observing. So, at present, if this kind of epidemic policy or maintain the current situation, because Beijing has become more serious in recent days. In fact, many of our colleagues are no longer in the office. Only about 20% of them are allowed to come to work. This year, in April and May, Beijing has had one. So how long will this situation last? It's hard for us to predict now. We can only abide by the entire government's prevention policy. Right, so this has a lot of impact on our business itself. This may not just be a few years. Yes, yes, yes, yes, yes, yes, yes, yes, yes, yes, yes, yes, yes, yes, yes, yes, yes, yes, yes, yes, yes, yes, yes, yes, yes, yes, yes, yes, yes, yes, yes, yes, yes, yes, yes, yes, yes, yes, yes, yes, yes, yes, yes, yes, yes, yes, yes, yes, yes, yes, yes, yes, yes, yes, yes, yes, yes, yes, yes, yes, yes, yes, yes, yes, yes, yes, yes, yes, yes, yes, yes, yes, yes, yes, yes, yes, yes, yes, yes, yes, yes, yes, yes, yes, yes, yes, yes, yes, yes, yes, yes, yes, yes, yes, yes, yes, yes, yes, yes, yes, yes I talked about this in the previous Q&A. We will not expand blindly. We will also use revenue as a guide and profit as a guide. We just talked about Q3's net profit from 3.6 to 6.3. Because, Thomas, you just talked about the impact of the pandemic on the budget for next year. I can only tell you that we are still thinking about how the pandemic will continue according to this policy. So the overall strategy will be more conservative. But the specific numbers, because we are in the process of doing it, I think it will be clear at the end of December or early in the night. In fact, we just started the first round of the general meeting today. So I can't share the data with you yet. The second question will be answered by Harry.

Thank you, Thomas. So on your second question regarding the Q4, so as we mentioned, we do see, first point, we do see a relatively expected recovering curve on the top line, right, starting from last quarter and carry from this quarter and Q4, sequentially. So the total revenue will be an improving trend in Q4. And in terms of the mix, given we have almost completed the initiatives on the CDM business adjustments on the priorities in terms of investments and the client mix, so I think that provided us with a relatively stable base to project the public cloud revenue in Q4. Because of that, I think in Q4, our public cloud as a total will see a sequential marginal improvement on the top line, but the profitability on the line of the public cloud will continue to see a positive contribution for the company's total growth margin in Q4. And on the enterprise cloud side, as we mentioned, I think if you're really looking back from Q1, Q2, and this quarter, And as Zozo mentioned, part of the Q2 due to the COVID measures in Beijing city that preventing us from some of the project biddings and deployments and execution in Q2, which was around about April and May and sometime in part of July or June, July. We do actually try our best in Q3 this time to accelerate the deployment execution. So hopefully, Some of the flagship projects, including a few important projects that we discussed and disclosed earlier, for example, some of the provision level healthcare cloud, hopefully we can be deployed and fulfill the execution in Q4, and that will carry with the revenue booking in Q4. So with that, I think our enterprise cloud, you may see a relatively little step up of the revenue of Enterprise Cloud in Q4 as part of the total revenue contribution. So overall my feeling is right now I think the sequential improvement on both top line and the growth margin will be two important priorities for management team while we will need to continue to make sure that our cost control measures of expenses life will carry forward. Hopefully we'll have some benefits in Q4. and Q1 starting from next year as well. So it will take some time, but I think some of the initiatives we already implemented in place, just we need to have the time clock and see the benefits going forward. Thank you, Thomas.

Thank you. And I think it's just a translation of what Mr. Zhou responded to the first question. So the COVID situation has been going on for years, and honestly speaking, it has been impacting the overall society significantly across all verticals, including us. And like you rightly pointed out, we are also observing and trying to see what the next step might be. As you might be aware, in recent days and weeks, the situation in Beijing is becoming more severe. To abide by the government rules, we have only 20% of the workforce currently working in the office, And as you know, there has been one situation like this back in April and May. So it's really difficult to predict or to comment a situation. What we can do is to abide by the rules promulgated by the government. However, I think from a strategy perspective, in light of the uncertainty, in potential uncertainty in future years, from a strategy perspective, what we can do is to maintain a robust and relatively defensive approach And what I mean by that is exactly what we commented in the prepared remarks, which is no longer blindly pursuing top-line growth, but to switch to a pursuit of sustainability and path to profitability. And as you have seen, the growth margin in the third quarter has already improved quite a lot, from 3.6% to 6.3%. We believe that by abiding by that relatively conservative and robust strategy, we'll be able to navigate through the potential uncertainties in the years to come. As to your question of our budgeting, we're currently going through the process of making a comprehensive budgeting, currently going through the first round of review and compiling the numbers. We expect to have more clarity towards the end of December or the beginning of January. So, unfortunately, we don't have much more data to share at this stage.

Thank you.

Thank you.

Your next question comes from Zidane Zane with CICC. Please go ahead.

Thank you for accepting my question. I have two questions. The first question is about the expectation of the transfer of Non-Gap EBITDA Margin. Because we see that the Non-Gap EBITDA Margin has a slight decline in the third quarter. I would like to ask the management level if there is a new expectation for the transfer time. The second question is about our CapEx plan for the next two to three years. In addition, we see that many overseas cloud computing manufacturers are extending their entire server's useful life from the past four to five to six years. So my first question is regarding our non-GAAP EBITDA margin, which dropped slightly quarter on quarter in Q3. So I just wonder, do we expect a delay in terms of the timing for non-GAAP EBITDA margin break-even? And secondly, what is our CapEx plan for the next two to three years, and are there any foreseeable plans to further extend the use for live service of the servers as some of the overseas peers have extended that from four to six years? Thank you.

Thank you. This is Henry. I'm happy to take on those three questions on the financial-related matters. The first question is regarding the EBITDA break-even. Yeah, we do acknowledge that the EBITDA, on a sequential basis, we actually dropped a little bit marginally. We noted that. There are a few things on the line. First of all, if you look at the total expenses on the dollar value, actually our sales, marketing, and R&D expenses actually was quite stable, so there's no major changes on that. However, the booking of certain GMA expenses due to, for example, the Hong Kong bill primary lifting projects that we actually need to pay certain fees, as you may understand, that actually also eating up the bills as well. And also, given this year we do have certain cost cutting, for example, optimization of human capital of the company, We need to pay certain compensations for the people. They may choose other career tracks for things like that. We did a batch of that arrangement in Q3, especially towards the end of Q3. So the savings on the salary has not been reflected on the expenses in Q3, while we need to pay even more for the compensation for the people that they choose other career tracks. So, in and out, you see actually the fluctuation and even increasing of certain expensive items. But I think these are the right things to do for the company and the benefits on the cost of savings and expenses will be gradually released in Q3 and I think for sometime starting from Q1 next year. So that's actually quite clear on the underlying reasons. So we don't worry too much about that little fluctuation. But the underlying or the normalized operation expenses in Q3 already kind of declined. So given that, as you probably know that our priority at this moment is improving the growth margin. As we mentioned, the growth margin has been improving from almost only 1% Q4 last year to about 6.3% this quarter, that's actually a meaningful improvement. And if you look at the growth profit on the dollar value, we almost doubled from Q2 to Q3, from about 60 million RMB to about 120 million RMB for this quarter. So we do believe that improving on the growth margin will be a first level of the driver of improving EBITDA and break even of EBITDA timing. So, given that, we think sometime for next year, we do hope the EBITDA margin can improve at a little bit faster pace compared with the gross margin sometime at the point of next year. And on the other side, we do hope that after we complete all the necessary capital market transactions, our expenses ratio will further come down as well. So, that's the first point. The second point regarding the CapEx plan, I think this year we're running relatively is towards the low end of the capital budget for 2022 while we print the same level of the revenue target, I think which is a good sign. For the next two to three years, I think we may keep relatively same level at around about 1 billion RMB each year. And you may remember we discussed that we may need to hit a certain server replacement cycle sometime around like 25, 26, but I think so far we feel comfortable regarding about 1 billion RMB on the capital expenditures. But given we do have about 5 billion cash, and right now we have multiple access to the capital, not only from the stock market, for example, the long-term financing and the cheap leasing arrangements, et cetera. So we do hope over 90% of the capital expenditures, we may find other ways to fund those capital expenditures outlay rather than tap into our own net cash balance. I think that's going to be a good point on the capital structure and we don't need to burn too much cash on hand. And the third question regarding the servers, I think you're right. We do notice that the major U.S. cloud company has revised the DNA policy from four years to five years last year, and some of them are discussing the shifting to six years, which actually reflecting the nature of the technology as they evolve because most of the new servers starting from these two years, for example, some of the expensive ones, they actually, you know, the cost, the price point is high, but they actually can use, for example, two times of the price point, but they can use like three, four times of the life cycle. I think it does make sense for the U.S. peers to extend that. But given we do adopt a very conservative financial policy, we do not have any plan at this moment to extend our DNA policy, even though we understand extending from four years to five years or even six years, we will have a relatively good impact on the growth margin because we have lower DNA expenses. But at this moment, we do not have any plan to revise that policy, but we may reserve that if we see other Chinese players change the policy. It's going to be an uplift to our growth margin and reduce the DNA census. Thank you.

Thank you. That's very helpful.

Once again, if you wish to ask a question, please press star then one on your telephone and wait for your name to be announced. The next question comes from Joel Ying with Nomura. Please go ahead.

Thank you, Manager Chen.

I have a question. I see that our GP Margin is doing well this quarter. Can you share with us how our GP Margin has been split from the public sector and the corporate sector? And what exactly has helped us improve our GP Margin? And can we maintain this situation in the coming quarter? I'll translate myself. So regarding the GDP margin improvement, can you talk about the situation, so where it comes from, from public cloud, enterprise cloud, and will it be sustainable into the first quarter and going forward? Thank you.

Thank you, Joe. Yeah, on the GP margin, you touch upon a few things, the improvement, the breakdown, the root causes, and the sustainability. It's a very broad scope, actually. So I think I'll start with the reasons first. So there are a few things we actually started to work on since Q4 last year, so it's not actually happening only this quarter. There are a few things involved, as you may remember. First of all is we're kind of cutting some losses for certain loss-making clients. Number two, we optimize the product mix, right? So try to make the computing, the storage, some of the big data solutions, and certain more high-value added products and more profitable products, we invest a bit more. So I think these are the second reason. We start to do that from Q1 this year. And the third reason is the improvement and the screening of the projects. So as Soto mentioned in the CEO remarks, we actually, starting from this quarter, have adopted a very comprehensive approach to analyze the returns on each project and different ratings internally for different clients, et cetera. So we can prioritize and select the right projects we're working on, and some of that has already yielded good results for this quarter as well. And the last reason is actually, if you remember last year, we do kind of learn our experience and the lessons. We bought a little bit too much of the servers and we ordered a little bit too much of the bandwidth and it cannot be returned. So they're eating up on the gross margin last year, especially the second half. So this year we have changed our process to evaluate the procurement process to make sure that we do not kind of over-ordered, and we can use them wisely. So I think these are the kind of four different things that help the gross margin can improve for this quarter to see the results. So even though we did something last year, but it's going to be a good time to see the results. Speaking about the mix, I think that both public cloud and enterprise cloud has contributed to the incremental $60 million of the margin improvement because, as you know, given the base of the public cloud and the enterprise cloud, it's actually quite balanced and we cannot lose any of that. So it's both important. And on the sustainability, I think the first three reasons, as I mentioned, will carry a long way. So it's going to be, you see, hopefully we can see a better margin in Q4 and sometime carry over to next year as well. And certain enterprise cloud projects, as you know, we're booking the revenue only at completion, but some of the costs we already booked. So hopefully in Q4, at the peak time of enterprise cloud delivery, you will see additional step up on enterprise cloud contribution. So if you want to break down the reason for Q4, let's say going forward, I think enterprise cloud will be relatively more important compared with public cloud in Q4, given the timing of delivery on that. Thank you, Joe.

Thank you, Henry.

The next question comes from Timothy Zay with Goldman Sachs. Please go ahead.

Thank you for taking my question. My question will be about the outlook for 2023. As we understand, this year is the transition year in terms of our business adjustment and also there is impact from the macro environment as well as COVID. Could you share some thoughts on how we should look at the demand of our cloud industry in China and also for our revenue growth? When should we see an inflection point in terms of cloud revenue year-on-year growth into 2023? Thank you.

I'll answer first, and then Harry will add to it. First of all, as I said at the meeting, we are just starting to do the first round of budget meeting. So, the total data has not been released yet. So, I can't provide you with the date of next year. We may have to wait until around the end of the year. Then I can talk about a concept of red. It may also be useful for everyone to understand and understand our future. The first one is actually our or the entire cloud industry. I think it's all because of the impact of the epidemic. From this year on, what I observed is basically that the income from the past This income growth is the core goal. Gradually, this has also been adjusted to the growth of profits or the improvement of profits. For such a leadership idea, we are no exception. So this is one. The second is the epidemic. What is the policy of the epidemic prevention and control in the future? After the two meetings next year, the country's overall plan for the economy after the pandemic is still uncertain. So when we make this budget, or at least in the next year or two, we will still look at it in a more cautious way. So we will also take a series of measures, including we will go like Gong Youyun, we will go to those long-term non-profitable projects, we will really gradually withdraw. The focus will be to do this relatively good performance level project in detail. Secondly, we will also go to uh We will continue to do our best. And we will be more cautious to explore new industries and fields. For example, new cars and so on. This is basically one of our big guiding thoughts. In general, we must, as the last speaker said, Okay, just very quickly responding to your question. The first point is, as I commented previously, we're currently undergoing the first round of budgeting for the next year.

and we currently do not have a comprehensive picture which we will be able to have towards the end of this year to share more color to the market and to the investors. Now the second thing is although that being said, I think I can share with you some of my thoughts towards the macro situation and our strategy in response to that. The first is, given the pandemic situation and the control measures within China, We have been changing the guiding principle, as I commented, from the pursuit of revenue growth to profitability, which is also a change that we have been increasingly observing within the sectors. The second point being there still remains significant uncertainty to the COVID control measures that will come, and also including the uncertainties of what the country's overall economic planning after the two sessions in 2023 is going to be. So we generally adopt a conservative and defensive approach. And this approach including some of the following measures. Number one, we will exit some of the projects and customers and transactions that have not been profitable for a long time, for the long term. And secondly, we'll be looking at our customer base and adjust the customer base structure. In particular, in the past, some of the largest customers have been commanding a large share of revenue contribution and have impacted to our financial performance. And we might decrease that revenue contribution and increase the revenue contribution coming from the waist and shoulder level kind of customers. And thirdly, in terms of enterprise cloud services, we will continue to dig deeper into the strategically selected verticals, as we have done in the past, but also cautiously explore new verticals that are highly beneficial for the cloud industry, for example, the electric vehicle industry. That's some of the thoughts that I can share with you at a macro level. Thank you.

Thank you, Timothy. At one point as well, while we follow the market and client demands carefully and while we are looking for, as you do as well, for the next kind of acceleration or the V-shaped acceleration of the demand from client, we have a capacity on the cash reserve as well so as you can see that we already deliver a net positive on operating cash flow side this quarter and hopefully for next quarter and going forward we can continue to do that so we remain relatively robust on the cash balance and while we're investing carefully on the potential new verticals that will carry relatively faster growth, as Dozo mentioned, for example, the new energy EV cars and other verticals as well. So I think we do not worry too much about the timing because we have enough cash and we can wait for the market to come back and work with the right clients. So I think that's actually one more point I just want to say as well. Thank you.

Thank you. That's very helpful.

There are no further questions at this time. I will now hand the call back to Ms. Shan for any closing remarks.

Thank you, operator. Thank you all once again for joining us today. If you have any further questions, please feel free to contact us. Look forward to speaking with you again next quarter. Have a nice day. Goodbye.

This does conclude our conference for today. Thank you for participating. You may now disconnect. Thank you. you Thank you. you you you Thank you. you you Thank you. So, Thank you. Thank you. Thank you. Thank you.

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Thank you for standing by and welcome to the Kingsoft Cloud Holdings third quarter 2022 earnings conference call. All participants are in a listen-only mode. There will be a presentation followed by a question and answer session. If you wish to ask a question, you will need to press the star key followed by the number one on your telephone keypad. I would now like to hand the conference over to Ms. Nicole Shahan. IR manager. Please go ahead.

Thank you, operator. Hello, everyone, and thank you for joining us today. Kingsoft Cloud's third quarter 2022 earnings release was distributed earlier today and is available on our IR website at ir.tsyun.com, as well as on global newsware services. On the call today from Kingsoft Cloud, we have our Vice Chairman and the CEO, Mr. Tao Zou, and CFO, Mr. Henry Ho. Mr. Zhou will review our business strategies, operations, and company highlights, followed by Mr. Ho, who will discuss the financials and the guidance. They will be available to answer your question during the Q&A session that follows. There will be consecutive interpretation. Our interpretations are for your convenience and reference purpose only. In case of any discrepancy, management statement in original language will prevail. Before we begin, I would like to remind you that this conference call contains forward-looking statements within the meaning of Section 21E of the Security Exchange Act of 1934, as amended and as defined in the U.S. Priority Security Litigation Reform Act of 1995. These forward-looking statements are based upon management's current expectations and current market and operating conditions, relate to U.N. standing well-known or unknown risk, uncertainties, and other factors. all of which are difficult to predict and many of which are beyond the company's control, which may cause the company's actual results, performance, or achievements to differ maturely from those in the forward-looking statements. Further information regarding these and other risks and certainties or factors are included in the company's filings with the USFDC. The company does not undertake any obligation to update any forward-looking statements. as a result of new information, future events, or otherwise except as required under applicable law. Finally, please know that unless otherwise stated, all financial figures mentioned during this conference call are denominated in RMB. It's now my pleasure to introduce our Vice Chairman and CEO, Mr. Zotao. Please go ahead. Thank you.

Hello, everyone.

Welcome to the 3rd quarter of 2022, Since we took office in August, this quarter, we have been working on the system of strategic business and financial situation. Based on this, we strongly recommend various measures. First of all, we continue to invest in technology, focus on the core of business, return to the original and original nature of the cloud. Secondly, we are working on customer and project processing, managing costs, and optimizing interest rates. Hello, everyone.

Thank you all for joining Kingsoft Cloud's third quarter 2022 earnings call. Since taking on the CEO role in August, I have been leading the company through a systematic review of our strategy, business, and financials. And during the quarter, we continued to implement various initiatives in a solid and down-to-earth manner. First, we continued to invest in technology, focus on our core businesses, and revive our original vision for cloud services. Second, we continued to review and evaluate our customer base and project portfolio, strengthen cost control to achieve a better balance between revenue growth and profitability. At the same time, we continue to strengthen our ecosystem synergies, explore high-value business opportunities, and pursue a path of high-quality development.

We achieved solid financial performance in the quarter. Our total revenues were RMB 1.97 billion,

in line with our guidance adjusted gross margin improved significantly to 6.3 percent from 3.6 percent in the second quarter and our operating cash flow has been positive for two consecutive quarters indicating that our business adjustment and cost control efforts are starting to yield initial results

The company is committed to technology, focusing on the core product capabilities of iFast. According to the China Data Management Solution Market Report, which was first published in the third quarter, by the Shalivun Investment Institute, Xinshanyun Data Management Solution Project is based on the comprehensive performance of innovation and growth capabilities, and is directed by market leaders. At the same time, In terms of business, we adhere to the conviction

of building success based on technology, continued to focus on building key product capabilities on the IaaS and PaaS layers. These efforts were recognized by Frost and Sullivan's LeadLEO Institute in its China Data Management Solutions Market Report published in the third quarter this year, in which Kingsoft Cloud Data Management Solutions ranks among the leaders of the market. for innovation competency and growth performance. Meanwhile, IDC's latest edition of China's software-defined storage tracker, 2022 First Half, ranked our enterprise-level storage solution, King Storage, as top four in China's software-defined object storage market.

In terms of ecological cohesion, the company cooperates more closely with Jinshan Office Technology In terms of ecosystem collaboration, we stepped up our technological cooperation with Kingsoft Office

to achieve enhanced cloud document processing, including authentication, encryption, and proofreading. Leveraging our cloud computing capabilities, we helped Kingsoft Office strengthen the business logic layer for cloud document processing, and thereby further improved their end-user experience.

Facing different industry scenarios, the company continues to focus will be built into the customer in the industry. In the public service field, we build economic brains for a core city, take advantage of the technical capabilities of mixed cloud, distributed storage, and other technologies to promote the integration of economic affairs. In the financial field, through the project cooperation with large shareholder banks, our data service, original data management, and other data governance In terms of different business scenarios,

We continued to focus on our core industry verticals, replicating our successful Lighthouse projects and apply to customers in the respective sectors. In public services space, we built a smart cloud solution for our municipality, leveraging our hybrid cloud and distributed cloud storage technology, among others, to enable and facilitate the management of economic affairs in a coordinated and integrated manner. In financial services sector, we validated our data governance services capabilities, particularly in data lake and metadata management in various projects for major commercial banks. We will continue to replicate such success with more clients in the industry. In the healthcare sector, we're about to complete the capacity expansion projects for the medical image cloud in regions including Sichuan and Chongqing, a testament of our ongoing support and monetization to address our customers' needs to expand and upgrade their existing projects. Overall speaking, we will continue to invest in technology, focus on core businesses, and enhance the foundation and the structure which enables sustainable, high-quality development. Under the backdrop of the wave of digitalization, we aspire to penetrate deep in verticals of strategic choice and offer our customers safe, robust, and efficient cloud computing services.

I will now pass the call over to our CFO, Henry.

to go over our financials for the quarter. Thank you.

Thank you, Zouzong, and welcome everyone for joining the call. Now I will walk you through the financial results for the third quarter 2022. We have actively taken measures to improve efficiency, demonstrating our strong commitment to pave the path for profitability. This quarter, our adjusted growth margin has improved considerably and continuously, from the lowest point of 1.2% in the fourth quarter of 2022 to 3.6% in the second quarter this year, and further to 6.3% in the third quarter. Our operating cash flow has been positive for the past two quarters consecutively. and we have achieved 100.9 million RMB net operating cash flow this quarter. Our total revenue was 1,968.8 million RMB in Q3. Within that, revenues from public cloud services was 1,349.0 million RMB, while increased by 4.4% compared with Q2. It represents a 20.2% decrease compared to the same period in 2021. The change was primarily due to the company's proactive scaling down of CDM business, with its growth billing decreasing by about 28% on a YOY basis. Revenues from enterprise cloud services was 622.0 million RMB. which is relatively stable compared with Q2 2022 as we navigated a challenging operating environment, including the impact from resurgence of COVID-19 in China, while proactively applying more selective criteria to project screening to strive for better profitability and cash flow. Our cost saving measures are well on track within our plan. Total cost of revenues decreased by 20.6% year-over-year and remained stable quarter-to-quarter at 1,846.4 million RMB. IDC costs decreased significantly by 23.6% year-over-year from 1,410.9 million RMB to 1,087.3 million RMB this quarter. Depreciation and amortization costs increased by 26.9% from 200 million RMB in the same period of last year to 253.7 million RMB, while remaining stable compared to last quarter. It is in line with our revenue mix adjustments as we moderated the procurement process of servers of public cloud. Solution development and services costs increased from 160 million RMB to 443.1 million RMB this quarter. The increase was mainly due to the consolidation of Camelot since September last year. Fulfillment costs and other costs were 31.9 million RMB and 39.3 million RMB this quarter. The adjusted gross profit of this quarter was 124.7 million RMB. representing adjusted growth margin of 6.3%. The significant growth margin improvement was mainly due to the effect of cost control measures and strategic adjustments of our revenue mix. In terms of expenses, excluding share-based compensation, total adjusted operating expenses was 577 million RMB. Within that, adjusted R&D expenses was 231.6 million, increased from 190.8 million RMB from last quarter, as we remain focused on our technology development. Adjusted selling and marketing expenses was 125.5 million RMB, compared with 120.1 million RMB last quarter. Adjusted G&A expenses increased slightly from 196.0 million RMB last quarter, to 219.9 million RMB, which is partially due to the one-time-off expenses of Hong Kong listing projects. Net loss margin was 40.7% this quarter, and adjusted net loss margin was 24.8%. The adjustments were mainly due to the foreign exchange loss of 218.9 million RMB, caused by the significant fluctuation of US dollar RMB exchange rates, which is totally a non-cash item impact on the P&L items. As of September 30, 2022, our cash and cash equivalents and short-term investments amounted to 5.3 billion RMB, providing us sufficient liquidity for operations. The capital expenditures for this quarter was 253.3 billion RMB, which primarily consists of payments for servers, which we ordered previously. The decrease of capex was in line with our proactively scaling down our CDM business. We expect to keep our total capex within 1.5 billion RMB for the full year of 2022. In terms of share repurchase program, regarding our 100 million US dollar share repurchase program within a 12-month period as approved by the board and announced in March this year, we have been duly executing. Since the release of our Q2 earning results up to November 18, we bought a total of 10.41 million ADS shares for roughly about 23.92 million US dollars. Going forward, supported by our ample cash reserve of about 5.3 billion RMB, we expect to continue to execute from time to time, but wait to make repurchase. This effort fully demonstrates our board and management's strong commitment and full confidence in the long-term business prospects of the company. As we strive to reward our shareholders for their support, and we believe our share price will eventually reflect company true value. Finally, we submitted the application for Hong Kong U primary listing on July 27, 2022. As always, the listing and potential timing is subject to regulatory approvals. Looking ahead, although we are still implementing our strategy initiatives, including repositioning and cost control efforts on an ongoing basis, such adjustments have already yielded positive preliminary results as reflected in the clear improvement of the profit margin in Q3. We expect our total revenue to be between 2 billion RMB and 2.2 billion RMB for the fourth quarter of 2022. representing a quarter-over-quarter increasing of 1.6% to 11.7%. While these forecasts and comments above are based on our current and preliminary views of the market and operational environment, which are subject to change, we firmly believe that given the time, the effects of our ongoing strategic initiatives will continue to amplify and reflect on our financial in the mid to long term. Thank you.

Thank you. This concludes our prepared remarks. Thanks for your attention, and we are now happy to take your questions. Please ask your question in both Chinese Mandarin and English if possible. Operator, please go ahead. Thank you.

Thank you. If you wish to ask a question, please press star then 1 on your telephone and wait for your name to be announced. If you wish to cancel your request, please press star then 2. If you are on a speakerphone, please pick up your handset to ask your question. Your first question today comes from Thomas Chang with Jefferies. Please go ahead.

晚上好,謝謝管理層接受我的提問。 我的問題主要是關於最近疫情的一個 不確定性還有宏觀的一個影響。 這個會對我們明年我們做這個budget的時候 會有什麼的考量? 另外的話就是關於我們Q4, the revenue guidance, Thanks management for taking my questions. My first question is about the recent outbreak of COVID as well as the uncertainties of the macro environment. How should we think about the year term as well as 2023 outlook when we do the budgeting process? And number two is about the Q4 revenue guidance. Can management comment about the trend for public and enterprise during the quarter? Thank you.

Thank you, Thomas.

I don't know how to answer your question. It's very serious. This epidemic has indeed affected the entire industry in recent years. Not only us, It should be said that it has a great impact on the whole society and on all sectors of society. In fact, we are the same. In fact, what kind of policy is the next step for the whole epidemic? And this policy has been in our eyes for a long time. So, at present, if this kind of epidemic policy uh, uh, uh, uh, So this has a big impact on our business itself. This may not only be a few years, but it also has an impact on others. So in the next year, and therefore, in fact, overall, in the next few years, under this uncertainty, the overall strategy of our cloud is still relatively conservative. Yes, the main thing is that I also talked about it last week, that is, we will not blindly expand. Uh, uh, uh, uh, We are still thinking about this kind of policy in the context of the epidemic. So the overall strategy will be more conservative. But the specific numbers, because we are in the process of doing it, I think at the end of December or early January, there will be a relatively clear result. In fact, we just started the first round of the general meeting today. So on your second question regarding the Q4, so as we mentioned, we do see, first point, we do see a relatively expected recovering curve on the top line.

starting from last quarter and carry from this quarter and Q4 sequentially. So the total revenue will be improving trend in Q4. And in terms of the mix, given we have almost complete the initiatives on the CDM business adjustments on the priorities in terms of investments and the client mix, so I think that provides us with a relatively stable base to project the public cloud revenue in Q4. So because of that, I think in Q4, our public cloud as a total will see a sequential marginal improvement on the top line, but the profitability on the line of the public cloud will continue to see a positive contribution for the company's total growth margin in Q4. And on the enterprise cloud side, as we mentioned I think if you really looking back from Q1, Q2, and this quarter, and as Zozo mentioned, part of the Q2 due to the COVID measures in Beijing city that preventing us from some of the project bidding and the deployments and execution in Q2, which was around about April and May, and sometime in part of July or June, July, we do actually try our best in Q3 this time to accelerate the deployment execution. So, hopefully, some of the flagship projects, including a few important projects that we discussed and disclosed earlier, for example, some of the provision level healthcare cloud, hopefully, we can be deployed and fulfill the execution in Q4, and that will carry with the revenue booking in Q4. So with that, I think our enterprise cloud, you may see a relatively little step up of the revenue of enterprise cloud in Q4 as part of the total revenue contribution. So overall, my feeling is right now, I think the sequential improvement on both top line and the growth margin will be two important priorities for management team, while we will need to continue to make sure that our cost control measures of expensive life will carry forward hopefully we'll have some benefits in Q4 and Q1 starting from next year as well. So it will take some time, but I think some of the initiatives we already implemented in place, just we need to have the time clock and see the benefits going forward. Thank you, Thomas.

Thank you. I think it's just a translation of what Mr. Zhou responded to the first question. So the COVID situation has been going on for years, and honestly speaking, it has been impacting the overall society significantly across all verticals, including us. And like you rightly pointed out, we are also observing and trying to see what the next step might be. As you might be aware, in recent days and weeks, the situation in Beijing is becoming more severe. To abide by the government rules, we have only 20% of the workforce currently working in the office. And as you know, there has been one situation like this back in April and May. So it's really difficult to predict or to comment the situation. What we can do is to abide by the rules promulgated by the government. However, I think from a strategy perspective, in light of the uncertainty, in potential uncertainty in future years, from a strategy perspective, what we can do is to maintain a robust and relatively defensive approach And what I mean by that is exactly what we commented in the prepared remarks, which is no longer blindly pursuing top-line growth, but to switch to a pursuit of sustainability and a path to profitability. And as you have seen, the growth margin in the third quarter has already improved quite a lot, from 3.6% to 6.3%. We believe that by abiding by that relatively conservative and robust strategy, we'll be able to navigate through the potential uncertainties in the years to come. As to your question of our budgeting, we're currently going through the process of making a comprehensive budgeting, currently going through the first round of review and compiling the numbers. We expect to have more clarity towards the end of December or the beginning of January. So unfortunately, we don't have much more data to share at this stage.

Thank you.

Thank you.

Your next question comes from Zaid and Zain with CICC. Please go ahead.

Thank you for the question. I have two questions here. The first question is about the expectation of our non-GAAP EBITDA margin. Because we see that the non-GAAP EBITDA margin has a slight decline in the third quarter. I would like to ask the management team if we have a new expectation for the turning point. So my first question is regarding our non-GAAP data margin, which dropped slightly quarter-on-quarter in Q3. So I just wonder, do we expect a delay in terms of the timing for non-GAAP data margin break-even? And secondly, what is our CAPEX plan for the next two to three years, and are there any foreseeable plans to further extend the use for lives of observers as some of the overseas peers have extended that from four to six years? Thank you.

Thank you. This is Henry. I'm happy to take on those three questions on the financial-related matters. The first question is regarding the EBITDA breakeven. We do acknowledge that the EBITDA on sequential basis will actually drop a little bit marginally. We noted that. There are a few things on the line. First of all, If you look at the total expenses on the dollar value, actually our sales market and the R&D expenses actually was quite stable, so there's no major changes on that. However, the booking of certain G&A expenses due to, for example, the Hong Kong deal primary lifting project that we actually need to pay certain fees, as you may understand, that actually also eating up the bills as well. And also, given this year we do have certain cost cutting, for example, optimization of student capital of the company, we need to pay certain compensations for the people. They may choose other career tracks for things like that. We did a batch of that arrangement in Q3, especially towards the end of Q3. So the savings on the salary has not been reflected on the expenses in Q3. while we need to pay even more for the compensation for the people that they choose other career tracks. So in and out, you see actually the fluctuation and even increasing of certain expensive items. But I think these are the right thing to do for the company and the benefits on the cost of savings expenses will be gradually released in Q3 and I think for some time starting from Q1 next year. So that's actually quite clear on the underlying reasons. So we don't worry too much about that little fluctuation. But the underlying or the normalized operation expenses in Q3 are already kind of declining. So given that, as you probably know that our priority at this moment is improving the growth margin. As we mentioned, the growth margin has been improving from almost only 1% Q4 last year. to about 6.3% this quarter, that actually a meaningful improvement. And if you look at the growth profit on the dollar value, we almost doubled from Q2 to Q3, from about 6 million RMB to about 120 million RMB for this quarter. So we do believe that improving on the growth margin will be a first level of the driver of improving EBITDA and break even of EBITDA timing. So given that, we think sometime for next year, we do hope the EBITDA margin can improve at a little bit faster pace compared with the gross margin sometime at the point of next year. And on the other side, we do hope that after we complete all the necessary capital market transactions, our expenses ratio will be further combined as well. So that's the first point. The second point regarding the CapEx plan, I think this year we're running relatively well. towards the low end of the capital budget for 2022, while we print the same level of the revenue target, I think it is a good sign. For the next two to three years, I think we may keep relatively same level at around about 1 billion RMB each year. And you may remember we discussed that we may need to hit a certain silver replacement sometime around like 25, 26, but I think so far we're comfortable regarding about 1 billion RMB on the capital expenditures. But given we do have about 5 billion cash, and right now we have multiple access to the capital, not only from the stock market, for example, the long-term financing and the cheap leasing arrangements, et cetera. So we do hope over 90% of the capital expenditures, we may find other ways to fund those capital expenditures outlay rather than tap into our own net cash balance. I think that's going to be a good point on the capital structure, and we don't need to burn too much cash on hand. And the third question regarding the servers, I think you're right. We do notice that the major US cloud company has revised the DNA policy from four years to five years last year, and some of them are discussing the shifting to six years. which actually reflecting the nature of the technology as they evolve because most of the new servers starting from these two years, for example, some of the expensive ones, actually the cost, the price point is high, but they actually can use, for example, two times of the price point, but they can use like three, four times of the life cycle. So I think that makes sense for the US peers to extend that. Given we do adopt a very conservative financial policy, we do not have any plan at this moment to extend our DNA policy, even though we understand extending from four years to five years, even six years, we will have a relatively good impact on the growth margin because we have lower DNA expenses. But at this moment, we do not have any plan to revise that policy, but we may reserve that if we see other Chinese players change the policy. It's going to be an uplift to our growth margin and reduce the DNA census. Thank you.

Thank you. That's very helpful.

Once again, if you wish to ask a question, please press star then one on your telephone and wait for your name to be announced. The next question comes from Joel Yang with NEMARA. Please go ahead.

Thank you, Manager Chen.

I have a question. Seeing that our GP Margin this quarter has a relatively good recovery, can you share with us how our GP Margin has been disbanded from the public sector and the corporate sector? And what exactly has helped us improve the GP Margin? And can this situation be maintained in the next quarter? I'll translate myself. So regarding the GP margin improvement, can you talk about the situation, so where it comes from, from public cloud, enterprise cloud, and will it be sustainable into the first quarter and going forward? Thank you.

Thank you, Joe. Yeah, on the GP margin, you touched upon a few things, the improvement. the breakdown, the root causes, and the sustainability. It's a very broad scope, actually. So I think I'll start with the reasons first. So there are a few things we actually started to work on since Q4 last year, so it's not actually happening only this quarter. There are a few things involved, as you may remember. First of all is we're kind of cutting some losses for certain loss-making clients. Number two, we optimize the product mix. So try to make the computing, the storage, some of the big data solutions and certain more high-value added products and more profitable products We invested more, right? So I think these are the second reason. We start to do that from Q1 this year. And the third reason is the improvement and the screening of the projects. So as Sozo mentioned in the CEO remarks, we actually starting from this quarter have adopted a very comprehensive approach to analyze the returns on each project. and different ratings internally for different clients, et cetera. So we can prioritize and select the right projects we're working on. And some of that has already yielded good results for this quarter as well. And the last reason is actually, if you remember last year, we do kind of learn our experience and the lessons. We bought a little bit too much of the servers and we ordered a little bit too much of the bandwidth and it cannot be returned. So they're eating up on the gross margin last year, especially the second half. So this year we have changed our process to evaluate the procurement process to make sure that we do not go over-ordered and we can use them wisely. So I think these are the kind of four different things that help the gross margin can improve for this quarter to see the results. So even though we did something last year, but it's going to be a good time to see the results. Speaking about the mix, I think that both public cloud and enterprise cloud has contributed to the incremental 60 million of the margin improvement. because, as you know, given the base of the public cloud and the enterprise cloud, it's actually quite balanced and we cannot lose any of that. So it's both important. And on sustainability, I think the first three reasons, as I mentioned, will carry a long way. So it's going to be, you see, hopefully we can see a better margin in Q4 and sometime carry over to next year as well. And certain enterprise cloud projects, as you know, we're booking the revenue only at completion, but some of the costs we already booked. So hopefully in Q4, at the peak time of enterprise cloud delivery, you will see additional step up on enterprise cloud contribution. So if you want to break down the reason for Q4, let's say going forward, I think enterprise cloud will be relatively more important compared to public cloud in Q4, given the timing of delivery on that. Thank you, Joe.

Thank you, Kevin.

The next question comes from Timothy Zay with Goldman Sachs. Please go ahead.

Thank you for accepting my question. My question is about the income outlook for next year. Because I know that this year is the year when our business has improved, and there is also an impact of the pandemic. Thank you, Benjamin, for taking my question. My question will be about the outlook for 2023 as we understand this year is the transition year in terms of our business adjustment and also the impact from the macro environment as well as COVID. Could Benjamin share some thoughts on how we should look at the the demand of our cloud industry in China, and also for our revenue growth, when should we see an inflection point in terms of cloud revenue in your growth into 2023? Thank you.

I'll answer first, and then I'll start to add. First of all, as I said at the meeting, we are just starting to do the first round of budget meeting. So our current overall data um Because of the impact of the epidemic, from this year onwards, what I have observed is that from the past, income growth has been the core goal. Gradually, we have adjusted to profit growth or profit improvement as a guiding idea. We are no exception. So, This is one. The second is the epidemic. In the end, this one, this one, this one, this one, this one, this one, this one, this one, this one, this one, this one, this one, At least in the next year or two, we will be more cautious. We will take some measures, such as long-term non-profit projects. The focus will be to make this Lidl-Lidl-Lidl-Lidl-Lidl-Lidl-Lidl-Lidl-Lidl-Lidl-Lidl-Lidl-Lidl-Lidl-Lidl-Lidl-Lidl-Lidl-Lidl-Lidl-Lidl-Lidl-Lidl-Lidl-Lidl-Lidl-Lidl-Lidl-Lidl-Lidl-Lidl-Lidl-Lidl-Lidl-Lidl-Lidl-Lidl-Lidl-Lidl-Lidl-Lidl-Lidl-Lidl-Lidl-Lidl-Lidl-Lidl-Lidl-Lidl-Lidl-Lidl-Lidl-Lidl-Lidl-L Yes. In the field of industry, we will be more careful to explore new industries and fields. For example, the new car industry. This is basically one of our big leadership ideas. In general, we will put our energy into sustainable high-end development, to achieve a work direction that will win you over as soon as possible.

Okay, just very quickly responding to your question. The first point is, as I commented previously, we're currently undergoing the first round of budgeting for the next year, and we currently do not have a comprehensive picture, which we will be able to have towards the end of this year to share more color to the markets and to the investors. Now, the second thing is, although that being said, I think I can share with you some of my thoughts towards the macro situation and our strategy in response to that. The first is, given the pandemic situation and the control measures within China, we have been changing the guiding principle, as I commented, from the pursuit of revenue growth to profitability, which is also a change that we have been increasingly observing within the sectors. The second point being there still remains significant uncertainty to the COVID control measures that will come, and also including the uncertainties of what the country's overall economic planning after the two sessions in 2023 is going to be. So we generally adopt a conservative and defensive approach And this approach, including some of the following measures. Number one, we will exit some of the projects and customers and transactions that have not been profitable for a long time, for the long term. And secondly, we'll be looking at our customer base and adjust the customer base structure. In particular, in the past, some of the largest customers have been commanding a large share of revenue contribution and have impacted to our financial performance. And we might decrease that revenue contribution and increase the revenue contribution coming from the waist and shoulder level kind of customers. And thirdly, in terms of enterprise cloud services, we will continue to dig deeper into the strategically selected verticals as we have done in the past, but also cautiously explore new verticals that are highly beneficial for the cloud industry, for example, the electric vehicle industry. That's some of the thoughts that I can share with you at a macro level. Thank you.

Thank you, Timothy. Also, at one point as well, while we follow the market and client demand carefully, and while we are looking for, as you do as well, for the next kind of acceleration or the V-shaped acceleration of the demand from client, we have a capacity on the cash reserve as well. So as you can see that we already deliver a net positive on operating cash flow side this quarter, and hopefully for next quarter and going forward, we can continue to do that. So we remain relatively robust on the cash balance, and while we're investing carefully on the potential new verticals that will carry relatively fast growth, as Dozo mentioned, for example, the new energy cars and other verticals as well. So I think we do not worry too much about the timing because we have enough cash and we can wait for the market to come back and work with the right clients. So I think that's actually one more point I just want to say as well. Thank you.

Thank you. That's very helpful.

There are no further questions at this time. I will now hand the call back to Ms. Shan for any closing remarks.

Thank you, . Thank you all once again for joining us today. If you have any further questions, please feel free to contact us. Look forward to speaking with you again next quarter. Have a nice day. Goodbye.

This does conclude our conference for today. Thank you for participating.